LNG:

How will the Department of Energy's proposed changes to its process for reviewing liquefied natural gas export applications to countries without free-trade agreements impact projects currently under review and future project proposals? During today's OnPoint, David Goldwyn, president of Goldwyn Global Strategies and a nonresident senior fellow with the Energy Security Initiative at the Brookings Institution, talks about how the changes will impact the pace of approvals and long-term prospects for exporting LNG. Goldwyn, who served as the State Department's special envoy and coordinator for international energy affairs from 2009 to 2011, also weighs in on congressional efforts to expedite the LNG export project approval process.

Transcript

Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. With me today is David Goldwyn, president of Goldwyn Global Strategies and a nonresident senior fellow with the Energy Security Initiative at the Brookings Institution. David served as the U.S. State Department special envoy and coordinator for international energy affairs from 2009 to 2011. David, thank you for coming back on the show.

David Goldwyn: Pleasure to be here.

Monica Trauzzi: David, the Department of Energy recently announced proposed changes to the process for reviewing LNG applications to non-free-trade-agreement companies. We're going to get into all the specifics of the proposal in a moment, but broadly, how do you rate this step by the administration?

David Goldwyn: I give it an A. I think it's really a long-overdue and very necessary step. It creates a level playing field for all the applicants. So, they have to make it through FERC, and if they do, then they get considered. It takes all the political fear out of this. We're not going to approve 18 Bcf a day in projects, so we're only going to score the projects which get final approval as having a potential impact on the economy and on prices. So now, that number is 2.2, not 9.7.

So, it's commercially reasonable and it eliminates the political fear. So, I think it's a very sound proposal.

Monica Trauzzi: In a recent article, you called the existing procedure "politically provocative." What are the issues with the way DOE is currently doing things?

David Goldwyn: Well, right now, anyone who has a letter and a postage stamp can apply for a non-FTA approval at the Department of Energy. And in December 2012 they said, "We will take all of those in order, looking at them every two months in the order in which they either filed with FERC or DOE." So, you don't have to spend the $100 million to make it through the FERC process. So, as a result, commercially realistic projects might be at the end of the queue and might not have been considered for years.

And it was politically provocative because they scored every conditional approval. And we were up to 9.7 Bcf a day, striking fear in the hearts of those who think that this is going to impact natural gas prices. But it's very possible that those projects would never become reality. So, it was provocative in that you were counting hot air. You were counting potential projects now, not real projects.

And what's changed now is: They're only going to score the ones that have final approval. So, they've cleared FERC, they've got their environmental clearance, they've got real contracts, they're ready to go. So, that number is a much more realistic number, and today it stands at 2.2 Bcf a day.

Monica Trauzzi: And we've been hearing from the industry that they needed more clarity about the overall process that DOE was using. Does this proposal give them the clarity that they've been looking for?

David Goldwyn: It gives them a lot of the clarity that they're looking for. Now they know what they have to do. They have to clear FERC. They know that they will be considered by DOE when that happens. And they know that there will be a national interest determination.

I think they would like two more things. First, I think they would like a little bit more certainty that when it's their turn the DOE will act quickly. And I think under the Energy Policy and Conservation Act DOE is actually obliged to act within 90 days of FERC making a decision. But DOE could just declare that as their policy and people would know how long to wait. So, I think that's one level of uncertainty they could eliminate.

The other -- there's a lot of questions about environmental concerns. DOE commissioned a couple more studies, and people are wondering whether the Department of Energy is going to score the upstream impacts of these projects when they come online. And I don't think that's the case. I think FERC has already rejected that position. But DOE has wisely, I think, looked at the impacts of shale, looked at life cycle impacts of these projects. So, they've signaled to the market that we have taken that into consideration. So, they've reduced the litigation risk -- because all of these applicants get sued as soon as DOE issues the license. So, I think that's another level of uncertainty that they've addressed.

Monica Trauzzi: So, who have you identified as the winners and losers?

David Goldwyn: Well, I think everyone who had a conditional approval who had already filed with FERC, they're a winner because now the risk of disapproval has gone down. If you were at the end of the queue and you had a real project, your risk of disapproval has gone down also, and now you've got a level playing field. Frankly, anybody who was over the 12 Bcf-a-day soft cap is a winner because their risk of delay or denial was pretty high.

So, the only losers in this project are people who probably couldn't afford to go through FERC in the first place, who were hoping for that lottery ticket from the Department of Energy to go out to investors and say, "Well, I'm number, you know, five in the queue coming up, so why don't you invest in me? I'll get my turn before somebody else who's got a brownfield project." So, I think those were probably not highly serious applicants anyway, and now they're on the same level field as everyone else.

Monica Trauzzi: So, what specific projects are the losers? Which ones that are in the pipeline?

David Goldwyn: Well, I wouldn't want to call out the, you know, the companies now. But I think, you know, if you look through there, the ones that -- well, put it this way: If you look at the queue at FERC, there are a bunch of projects that have filed and they have expected environmental impact statements coming out. Those are the projects that are ready to go now. Everyone else doesn't have an estimate of when their environmental assessment comes out, so that's the field, and they're all in a race to the finish.

Monica Trauzzi: What does this move by the Obama DOE indicate to you about the administration's views on the opportunities that exist with LNG exports?

David Goldwyn: Well, I think it signals first that they appreciate the benefits of LNG for the overall economy. I think they have a good sense of commercial reality now of what it takes to get these projects financed. I think it demonstrates political savvy, that they realize they don't have to scare people by inflating these numbers. And I think they've also signaled, I think, through the environmental assessments that they see natural gas as a significant substitute for coal, particularly overseas.

I think there's a political aspect to it too, with all that's going on in the Ukraine and other places. The administration doesn't want to say this is going to be a panacea for those issues. But they have signaled that they appreciate that it will be helpful, and that the more they move along on getting these projects approved, the more liquid the global LNG market is and the more molecules can flow to the people that need them -- even if they're not American molecules.

Monica Trauzzi: So, there's a comment period happening. Is there anything else that potentially stands in the way of this becoming final?

David Goldwyn: Well, there's always litigation. So, I think in the next 45 days people will comment on the process and say whether they like it or they don't. And they'll comment on these two environmental reports as well. But I think DOE will move along. I think the big risk is litigation risk. And pretty much anybody who gets one of these licenses gets sued, and you kind of count on four months to get through that litigation process as part of your project timeline.

Monica Trauzzi: In Congress, the House will be taking up legislation soon that focuses on expediting DOE's approval process. Is there still a need for something like that, keeping in mind these changes that DOE is already moving on?

David Goldwyn: I really think not. I appreciate the sentiment of a lot of the proponents of this bill because the United States is the only country in its peer group which requires this kind of approval. So, American LNG projects are disadvantaged in that way. But realistically, this administration -- and, you know, it's an act of Congress; Congress did this -- is going to require a determination of whether these exports are in the national interest. And it's not going to go away, and the president's not going to sign it.

So, to pick out a particular group like NATO or to say everybody who is a member of the WTO is going to get this, I think, is unrealistic. If they wanted to channel themselves constructively, I think a timeline is a realistic place to go. I think saying, "We've got to have DOE act in 90 days so we know whether we've got an up or a down on our project" -- I think that's realistic, and that would be a constructive place to put that legislative effort.

Monica Trauzzi: All right, David. Very interesting. Thank you for coming on the show.

David Goldwyn: My pleasure.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.